From left: Former Winick Realty President Cory Zelnik, former Duane Reade location at 4 Times Square, and current location at 225 Broadway (building photo source: PropertyShark)

In his second day on the witness stand, former Winick Realty Group President Cory Zelnik described additional allegedly fraudulent leasing transactions with drug store chain Duane Reade, this time at various city locations including one on lower Broadway damaged in the 9/11 terrorist attacks and another at the site of the Durst Organization’s One Bryant Park in Midtown.

Zelnik took the stand for his second day of testimony yesterday in a case brought by the United States Attorney in Manhattan against two former executives of drug store chain Duane Reade, who are accused of multiple crimes including securities fraud, which involved allegedly bogus real estate deals.

Zelnik is not charged in the case, but is testifying under a grant of immunity from prosecution for his participation in the allegedly fraudulent deals.

The defendants Anthony Cuti, former Duane Reade CEO, and William Tennant, a former CFO and senior vice president, who later served as an outside consultant for the drug store chain, are accused of conspiracy to commit securities fraud, filing false quarterly and annual reports, and other charges. They each face up to 20 years in prison.

Prosecutors say Cuti and Tennant orchestrated allegedly sham real estate
transactions in which Winick Realty and other entities paid the
drugstore millions of dollars for leases that authorities said had
little or no value for reasons that included that they were set to
expire soon. The Duane Reade executives used those funds to boost net
income in quarterly or annual filings, and thereby the company share
price, authorities said. The brokerage and other entities were later
repaid through additional transactions the government contends were
fraudulent, in so-called “round-trip” payments. Duane Reade was not
charged and has said it is cooperating with authorities.

In yesterday’s testimony, prosecutor Jonathan Streeter walked Zelnik through documents related to an allegedly fraudulent deal struck in June 2001 to pay Duane Reade $920,000 to not renew its leases at four city locations including 225 Broadway, a block from the World Trade Center site.

That location at Broadway and Barclay Street was badly damaged in the 9/11 terror attacks and its lease was set to expire in October 2002, so was not worth the $300,000 value assigned to it as part of the $920,000 arrangement, Zelnik said.

In fact the partnership Zelnik participated in and Winick CEO Jeff Winick controlled, called Danielle Equity Holding, did not use the rights it paid nearly $1 million for, Zelnik said. Neither Winick nor any of his companies are charged with any crimes.

“We would not have had the ability to market the property,” Zelnik said.

Streeter asked him why he signed letters giving valuations to the properties that he says were false.

“This was part of the agreement,” Zelnik said, alluding to an alleged arrangement between him, Jeff Winick and Cuti to structure such lease transactions that the government argues are bogus.

Cuti’s defense attorney Reid Weingarten said in his opening statement Wednesday that the deals the prosecution calls shams were in fact legitimate business transactions. He said Winick Realty had been profiting from store relocations and Duane Reade was getting stuck with paying rent on useless leases, which he referred to as “dead rent.”

In some instances, Weingarten said, Cuti told Winick he wanted the broker to take responsibility for the old leases, and if he could not lease the space he would have to pay the remaining rent.

Several brokers, who declined to be identified, told The Real Deal that was an unusual arrangement.

Zelnik left Winick Realty in July 2006 when he formed his own brokerage company Zelnik & Company, where he is CEO.

A now-demolished building at 115 West 42nd Street, in the footprint of Durst Organization’s One Bryant Park at Sixth Avenue and 42nd Street, was the site of another sham deal, Streeter said. Durst is not a party to any of the alleged sham deals, court records show.

At this Midtown property, prosecutors say Danielle Equity Holding agreed to pay Duane Reade $690,000 in June 2001 for control of the lease of the site the drug store planned to abandon to move to another Durst building one block west at 4 Times Square.

But Zelnik said in court yesterday the lease would be worth nothing near that sum. That is because the next day the drugstore and Durst struck a lease termination deal, which Zelnik and Winick had known about for months, which would allow the landlord to terminate the lease within 120 days.

With such a restriction, the lease was worth just a fraction of the money they paid for it, he said.

In fact Zelnik did do a short-term lease at the 115 West 42nd Street site, with a 99-cent store, but earned a tiny commission of about $7,000.

Could he and Winick have earned back the hundreds of thousands of dollars they paid for the rights, Streeter asked.

“No,” Zelnik responded.

There were no proceedings in the case today, and Zelnik is scheduled to return to the stand Monday.